Global mining and metals tax survey

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Since our last mining and metals tax survey in 2009, we have seen a dramatic change in the sector.

We surveyed most of the tax directors at the top 40 global mining and metals houses in the second half of 2012. This provided insight into the key challenges facing the industry, specifically around areas of:

Resource nationalism

Tax risk management

Tax planning

Transfer pricing

From backroom to boardroom

Resource nationalism and more tax controversy in operating jurisdictions are challenging tax directors like never before.

They have taken a large step forward in their roles, moving from a largely finance or treasury to a more strategic focus, with more frequent appearances in the boardroom.

To secure a more regular seat at the board table, the development of more commercial skills for tax directors requires:

The ability to manage commercial dynamics of tax policy with an economic understanding

Participation in the public debate of influencing tax policy

Strategic thinking of tax planning around the mine plan

Influencing natural resources tax policy

Two-thirds of tax directors are engaged in responding to proposed or actual resource nationalism, which has become more endemic in the mining and metals sector.

Three main forms of resource nationalism; have been spreading in developed and developing countries. These are:

Mandated beneficiation

Government ownership

Taxes/royalties

While most tax directors are not currently involved in the negotiations with governments or policy-makers in-country on the specifics of policies or mining investment stabilization agreements, they play a supporting but increasingly strategic role in preparing the negotiating team.

Sixty five percent of tax directors are consulted on tax issues before an investment is made. While it often doesn’t set the go / no-go outcome, it does inform the decision as increased taxes are a cash cost of production that can impair investment returns.

Aligning the tax agenda with the business agenda

With the increase in tax take in the form of resource nationalism, tax has become a larger proportion of total cost, making tax planning a key component of cost reduction and cash maximization.

It is not surprising that 54% of respondents emphasized the importance of tax planning to improve cash flow. We expect this figure should increase substantially as current pressures increase.

Tax or royalties are one of the largest components of cash costs and hence feed directly into the determination of cut-off grades and mine plans. Therefore, tax planning is increasingly becoming integrated with mine planning. The pursuit of tax credits can make a significant impact on cash costs.

In addition, to optimize cash flow, the ability to defer cash tax outflows can lower the political risk, especially in countries where risks are high.

Paradoxically, while mining and metals companies are looking to maximize short-term cash flows and reduce risk, the top KPI measuring 72% of tax directors is the effective tax rate. While this may result in choices made to lower the overall tax burden, it may not maximize the near-term cash flows the Board and shareholders are seeking.

Globalization — the increased importance of transfer pricing

Transfer pricing and tax-effective supply chain management (TESCM) that supports the business strategy will help maintain competitive advantage and deliver value to shareholders.

Jurisdictions without natural resources are seeking to take advantage of resource wealth in other ways. To attract mining and metals companies, these countries leverage their:

Favorable tax regimes

Abundance of legal and financial services

Stable fiscal and legal regimes

Good network of tax treaties

To stem any tax revenue losses through transfer pricing, tax authorities in producer nations have taken steps to restrict tax base erosion. They have also added staff devoted to transfer pricing, and secured the support of the OECD, which is undertaking a major project on base erosion and profit shifting.

A growing wave of mining tax controversy

Nearly three-quarters of tax directors surveyed have experienced a rise in the volume or aggressiveness of tax audits as governments seek to protect their revenue base, with 40% citing transfer pricing as high on the radar of tax authorities.

The increased number of disclosure and transparency schemes has also fueled the rise in tax enforcement.

Considering the harsh financial and reputational penalties that can result from a major tax controversy, tax directors and the company leadership realize that successfully and proactively managing uncertainty is imperative.

There has been a dramatic shift in risk appetite in 2012, where the majority of tax directors indicated their approach was “conservative” vs. “assertive” in 2009.

The shift to conservatism has been driven by:

Rising resource nationalism activity

Increased focus on cash savings

Globalization

A rise in controversy

While this caution is understandable, it may be that striking more of a balance with a more assertive stance would lead to better tax outcomes.

Mining and metals tax directors are taking a more proactive role in advising and planning for resource nationalism, cash conservation, and creating sophisticated transfer pricing structures in order to align tax planning with the strategic imperatives of their global operations.

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